A recent Law 360 story by Anna Scott Farrell, “Gov’t Ordered To Reimburse NY Hospital $1.7M in Legal Fees” reports that the U.S. Court of Federal Claims ordered the government to reimburse NewYork-Presbyterian Hospital $1.7 million in attorney fees for defending itself against doctors who claimed their payroll taxes were wrongly withheld and eventually settled.  The court's decision answered "a unique question of law" about whether a statute requiring the government to reimburse employers for payroll-tax claims extends to the employer's cost to litigate or negotiate such claims, according to the decision published.  "The short answer is that it does," the court said.

At the center of the decision was a textual parsing of Section 3102(b) of the Internal Revenue Code, which requires the government to indemnify employers against claims for taxes withheld under the Federal Insurance Contributions Act.  The law, as written by Congress, reads, "Every employer required so to deduct the tax shall be liable for the payment of such tax, and shall be indemnified against the claims and demands of any person for the amount of any such payment made by such employer."

The court disagreed with the government's position that the phrasing of "any such payment" should apply in a limited context to the payment for "claims and demands" made by the employer. It sided with the hospital's "most natural reading," which included the last part of the sentence — that the payment should apply to "any such payment made by such employer."  Further, the court said, "the plain meaning of 'indemnified' clearly encompasses attorneys' fees and costs."

The decision is a mile marker in a long battle that started in 2013, when three doctors who had worked as residents at the hospital blamed the hospital for the loss of tens of thousands of dollars in FICA payroll taxes on their wages when they were trainees.  The Internal Revenue Service had recently given the trainees a window of time to claw back their tax contributions for the years when they were considered students who weren't required to pay those taxes.  In their suit against the hospital, the doctors said it should have helped them recover the wages in time by filing protective FICA tax refund claims on their behalf, according to court filings.

The hospital settled with the residents in 2015, agreeing to pay them $4.5 million toward their lost wages plus their attorney's fees, bringing the total settlement amount to $6.6 million.  A year after the settlement, the hospital sued the IRS, seeking reimbursement of the $6.6 million it had paid the residents.  The Court of Federal Claims initially rejected the hospital's bid for reimbursement, but a three-member panel on the Federal Circuit overturned that ruling, saying the hospital was entitled to reimbursement from the government.